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                Jones &amp; Company, CPAs, has been engaged to prepare the partnership tax return for the 24/7 Partnership.&nbsp; As part of the engagement, Jack Jones, a tax partner of the firm, has asked you to review the initial return preparation and correct the letter of key points to be discussed with Daniel Day, the tax matters partner of the partnership.&nbsp; Form 1065 (U.S. Return of Partnership Income), Form 4562 (Depreciation and Amortization), and Form 4797 (Sales of Business Property) as prepared by a tax associate can be found in the Exhibits tab. &nbsp;Daniel holds a 50 percent partnership interest, and his sister, Katie Day, owns the other 50 percent partnership interest.<br>
                <br>
                To revise the document, click on each segment of the underlined text below and select the needed correction, if any, from the list provided.&nbsp; If the underlined text is already correct in the context of the document, select [Original text] from the list.<br>
                &nbsp;
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                <p style="text-align:center"><br>
                    Jones &amp; Company, CPAs<br>
                    107 Railroad Road<br>
                    Chaffee, N.Y. 14030</p>

                <p>&nbsp;<br>
                    August 15, 20X6<br>
                    &nbsp;<br>
                    Daniel Day<br>
                    Tax Matters Partner<br>
                    24/7 Partnership<br>
                    483 Main St.<br>
                    Chaffee, N.Y. 14030<br>
                    &nbsp;<br>
                    Dear Daniel:<br>
                    &nbsp;<br>
                    The Partnership Tax Return for the 24/7 Partnership has been prepared and is ready for your review and signature.&nbsp; I have enclosed selected pages of the return, which I would like to review with you.&nbsp;<br>
                    <br>
                    <strong>Section 179 Deduction</strong><br>
                    <br></p>
                <span class="parent mbg far {if condition='isset($log.1)'}xbg{/if}">{if condition='isset($log.1) && $log.1.topic_v eq 2'}<s>{/if}A Section 179 deduction in the amount of $28,573 is reported on the partnership tax return, and this is not an item separately reported to partners.{if condition='isset($log.1) && $log.1.topic_v eq 2'}</s>{/if}</span>
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                                <input type="radio" name="topic_t[1]" value="1" {if condition='isset($log.1) && $log.1.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>A Section 179 deduction in the amount of $28,573 is reported on the partnership tax return, and this is not an item separately reported to partners.</em>" ><br/>
                                <input type="radio" name="topic_t[1]" value="2" {if condition='isset($log.1) && $log.1.topic_v eq 2'}checked{/if} title="<em class='span'>A Section 179 deduction in the amount of $25,000 is reported on the partnership tax return, and this is separately reported to the partners.</em>"><br/>
                                <input type="radio" name="topic_t[1]" value="3" {if condition='isset($log.1) && $log.1.topic_v eq 3'}checked{/if} title="<em class='span'>There is no Section 179 deduction reported on the partnership tax return, but if there was a Section 179 deduction it would be separately reported to the partners.</em>" ><br/>
                                <input type="radio" name="topic_t[1]" value="4" {if condition='isset($log.1) && $log.1.topic_v eq 4'}checked{/if} title="<em class='span'>There is no Section 179 deduction reported on the partnership tax return, but if there was a Section 179 deduction it is not separately reported to the partners.</em>"><br/>
                                <input type="radio" name="topic_t[1]" value="5" {if condition='isset($log.1) && $log.1.topic_v eq 5'}checked{/if} title="<em class='span'>There is not a Section 179 deduction reported on the tax return because partnerships cannot take the Section 179 deduction.</em>"><br/>
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                <br>
                <strong>Ludwig Land</strong><br>
                <br>
                The sale of the Ludwig land, which was contributed to the partnership by Daniel Day when the partnership was first started, was sold for $800,000.&nbsp; The property had a cost basis to Daniel of $300,000 and a fair market value of $500,000 on 1/1/12 when the partnership started and at that time the land was contributed.&nbsp; 
                <span class="parent mbg far {if condition='isset($log.2)'}xbg{/if}">Because Daniel is a 50 percent partner, his share of the taxable gain on the sale is $250,000.</span>
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                                <input type="radio" name="topic_t[2]" value="1" {if condition='isset($log.2) && $log.2.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>Because Daniel is a 50 percent partner, his share of the taxable gain on the sale is $250,000.</em>" ><br/>
                                <input type="radio" name="topic_t[2]" value="2" {if condition='isset($log.2) && $log.2.topic_v eq 2'}checked{/if} title="<em class='span'>The gain is not recognized by either partner.</em>"><br/>
                                <input type="radio" name="topic_t[2]" value="3" {if condition='isset($log.2) && $log.2.topic_v eq 3'}checked{/if} title="<em class='span'>The gain is allocated $450,000 to Daniel and $50,000 to Katie.</em>" ><br/>
                                <input type="radio" name="topic_t[2]" value="4" {if condition='isset($log.2) && $log.2.topic_v eq 4'}checked{/if} title="<em class='span'>The gain is allocated $350,000 to Daniel and $150,000 to Katie.</em>"><br/>
                                <input type="radio" name="topic_t[2]" value="5" {if condition='isset($log.2) && $log.2.topic_v eq 5'}checked{/if} title="<em class='span'>The gain is allocated $50,000 to Katie and $450,000 to Daniel.</em>"><br/>
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                <br>
                <strong>Guaranteed Payments</strong><br>
                <br>
                <span class="parent mbg far {if condition='isset($log.3)'}xbg{/if}">Guaranteed payments in the amount of $350,000 are subject to self-employment tax.</span>
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                                <input type="radio" name="topic_t[3]" value="1" {if condition='isset($log.3) && $log.3.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>Guaranteed payments in the amount of $350,000 are subject to self-employment tax.</em>" ><br/>
                                <input type="radio" name="topic_t[3]" value="2" {if condition='isset($log.3) && $log.3.topic_v eq 2'}checked{/if} title="<em class='span'>No guaranteed payments were made to partners during this tax year.</em>"><br/>
                                <input type="radio" name="topic_t[3]" value="3" {if condition='isset($log.3) && $log.3.topic_v eq 3'}checked{/if} title="<em class='span'>The guaranteed payments reported on the tax return are treated just like non-liquidating distributions for self-employment taxes and income taxes.</em>" ><br/>
                                <input type="radio" name="topic_t[3]" value="4" {if condition='isset($log.3) && $log.3.topic_v eq 4'}checked{/if} title="<em class='span'>The guaranteed payments of $350,000 are subject to self-employment tax but not income tax.</em>"><br/>
                                <input type="radio" name="topic_t[3]" value="5" {if condition='isset($log.3) && $log.3.topic_v eq 5'}checked{/if} title="<em class='span'>Guaranteed payments made by the partnership are correctly deducted to arrive at the ordinary loss.</em>"><br/>
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                <br>
                <strong>Partnership Vehicle</strong><br>
                <br>
                The partnership also was able to take a loss on the vehicle that the partnership transferred to your and Katie's father, Ken Day.&nbsp; The car had an original cost of $15,000 and accumulated depreciation of $5,000 when it was transferred to Ken for the fair market value of $7,000. 
                <span class="parent mbg far {if condition='isset($log.4)'}xbg{/if}">The result is a $3,000 loss, which will be split evenly and reported on each individual tax return for Daniel and Katie.</span>
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                                <input type="radio" name="topic_t[4]" value="1" {if condition='isset($log.4) && $log.4.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The result is a $3,000 loss, which will be split evenly and reported on each individual tax return for Daniel and Katie.</em>" ><br/>
                                <input type="radio" name="topic_t[4]" value="2" {if condition='isset($log.4) && $log.4.topic_v eq 2'}checked{/if} title="<em class='span'>The result is a $3,000 loss, which is allocated 100 percent to Daniel because he is the tax matters partner.</em>"><br/>
                                <input type="radio" name="topic_t[4]" value="3" {if condition='isset($log.4) && $log.4.topic_v eq 3'}checked{/if} title="<em class='span'>The loss is not able to be deducted by either partner.</em>" ><br/>
                                <input type="radio" name="topic_t[4]" value="4" {if condition='isset($log.4) && $log.4.topic_v eq 4'}checked{/if} title="<em class='span'>The result is a $3,000 loss, which is allocated in any way the partnership decides.</em>"><br/>
                                <input type="radio" name="topic_t[4]" value="5" {if condition='isset($log.4) && $log.4.topic_v eq 5'}checked{/if} title="<em class='span'>The result is a $3,000 loss; Daniel is able to deduct his share of the loss; Katie is not able to deduct her share of the loss.</em>"><br/>
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                <br>
                <strong>Tax Losses</strong><br>
                <br>
                <span class="parent mbg far {if condition='isset($log.5)'}xbg{/if}">The ordinary loss will be split 50/50 and is deductible by both partners on their individual tax return without restrictions.</span>
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                                <input type="radio" name="topic_t[5]" value="1" {if condition='isset($log.5) && $log.5.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>The ordinary loss will be split 50/50 and is deductible by both partners on their individual tax return without restrictions.</em>" ><br/>
                                <input type="radio" name="topic_t[5]" value="2" {if condition='isset($log.5) && $log.5.topic_v eq 2'}checked{/if} title="<em class='span'>Ordinary losses are not deductible to partners.</em>"><br/>
                                <input type="radio" name="topic_t[5]" value="3" {if condition='isset($log.5) && $log.5.topic_v eq 3'}checked{/if} title="<em class='span'>The partnership did not report an ordinary loss in the current year.</em>" ><br/>
                                <input type="radio" name="topic_t[5]" value="4" {if condition='isset($log.5) && $log.5.topic_v eq 4'}checked{/if} title="<em class='span'>Daniel and Katie's basis in their partnership interest must first be examined to determine if they can deduct the ordinary loss.</em>"><br/>
                                <input type="radio" name="topic_t[5]" value="5" {if condition='isset($log.5) && $log.5.topic_v eq 5'}checked{/if} title="<em class='span'>If not fully utilized, the ordinary loss cannot be carried forward.</em>"><br/>
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                &nbsp;<br>
                <strong>Property Placed in Service </strong><br>
                <br>
                <span class="parent mbg far {if condition='isset($log.6)'}xbg{/if}">All tangible personal property placed into service this year must have been placed into service during the last quarter of the partnership's tax year.</span>
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                                <input type="radio" name="topic_t[6]" value="1" {if condition='isset($log.6) && $log.6.topic_v eq 1'}checked{/if} title="<em>[Original text]</em> <em class='span'>All tangible personal property placed into service this year must have been placed into service during the last quarter of the partnership's tax year.</em>" ><br/>
                                <input type="radio" name="topic_t[6]" value="2" {if condition='isset($log.6) && $log.6.topic_v eq 2'}checked{/if} title="<em class='span'>No property was placed into service during the current year.</em>"><br/>
                                <input type="radio" name="topic_t[6]" value="3" {if condition='isset($log.6) && $log.6.topic_v eq 3'}checked{/if} title="<em class='span'>All property placed into service during the year was placed into service during the middle of a month.</em>" ><br/>
                                <input type="radio" name="topic_t[6]" value="4" {if condition='isset($log.6) && $log.6.topic_v eq 4'}checked{/if} title="<em class='span'>The majority of tangible person property placed into service during the year was not placed into service during the last quarter of the year.</em>"><br/>
                                <input type="radio" name="topic_t[6]" value="5" {if condition='isset($log.6) && $log.6.topic_v eq 5'}checked{/if} title="<em class='span'>Some residential property was placed into service during the year.</em>"><br/>
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                <br>
                I look forward to our meeting next Tuesday to clarify these points and then finalize the tax return for the partnership.<br>
                <br>
                Sincerely,<br>
                <br>
                &nbsp;<br>
                Jack Jones, CPA<br>
                Jones &amp; Company, CPAs<br>
                &nbsp;

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            <p class='pdf_title'>2015 Form 4562</p>

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                <div><strong>Pop-up 1 (option 3)</strong><br>
                    <span style="color:#0000ff">There is no Section 179 deduction reported on the partnership tax return, but if there was a Section 179 deduction it would be separately reported to the partners.</span><br>
                    <br>
                    There is not a Section 179 deduction taken on this partnership tax return.&nbsp; If a Section 179 deduction was taken, it would be found on Form 4562. &nbsp;The Section 179 limits apply to the partnership and to each partner. &nbsp;The partnership determines its Section 179 deduction subject to the limits and then allocates the deduction among its partners.&nbsp; The Section 179 deduction is a separately stated item.<br>
                    <br>
                    &nbsp;<br>
                    <strong>Pop-up 2 (option 4)</strong><br>
                    <span style="color:#0000ff">The gain is allocated $350,000 to Daniel and $150,000 to Katie.</span><br>
                    <br>
                    The property contributed by Daniel at the start of the business had an increase in value of $200,000 ($500,000 ­ $300,000) during the time when Daniel held the property individually.&nbsp; The built-in gain is not taxed at the start of the partnership; however, the built-in gain is taxed first to Daniel upon the eventual sale of the property.&nbsp; The entire gain is $500,000, which is the difference between $800,000 and $300,000, as shown on Form 4797.&nbsp; The first $200,000 of that gain is allocated to Daniel, and the remaining $300,000 gain is allocated 50 percent to each partner ($150,000 to Daniel and $150,000 to Katie).<br>
                    &nbsp;<br>
                    <br>
                    <strong>Pop-up 3 (option 1)</strong><br>
                    <span style="color:#0000ff">Guaranteed payments in the amount of $350,000 are subject to self-employment tax.</span><br>
                    <br>
                    Guaranteed payments were made in the amount of $350,000, and these payments are subject to self-employment tax of the individual partners receiving the payments. &nbsp;Guaranteed payments should be deductible by the partnership in determining ordinary income or loss on page 1 of Form 1065. &nbsp;<br>
                    <br>
                    &nbsp;<br>
                    <strong>Pop-up 4 (option 3)</strong><br>
                    <span style="color:#0000ff">The loss is not able to be deducted by either partner.</span><br>
                    <br>
                    Form 4797 does show a loss incurred on the vehicle of $3,000. &nbsp;Losses are disallowed on related party sales transactions, even if they were made at an arm's-length fair market value price. &nbsp;Ken is a related party to both of the partners, and a loss on a transaction to him is not able to be deducted by either partner.<br>
                    &nbsp;<br>
                    <br>
                    <strong>Pop-up 5 (option 4)</strong><br>
                    <span style="color:#0000ff">Daniel and Katie's basis in their partnership interest must first be examined to determine if they can deduct the ordinary loss.</span><br>
                    <br>
                    As reflected on Form 1065, the partnership did generate an ordinary loss in the current year. &nbsp;Tax losses generated by a partnership are deductible by the partners of the partnership if the losses clear three hurdles: (1) tax basis; (2) at-risk amount; and (3) passive activity losses.<br>
                    <br>
                    &nbsp;<br>
                    <strong>Pop-up 6 (option 4)</strong><br>
                    <span style="color:#0000ff">The majority of tangible person property placed into service during the year was not placed into service during the last quarter of the year.</span><br>
                    <br>
                    The mid-quarter convention would be used if more than 40 percent of the cost basis of all tangible personal property acquired in a year occurs in the fourth quarter of the year.&nbsp; The convention reflected on Form 4562 is the half-year convention, which indicates that more than 40 percent of tangible personal property was not placed into service during the last quarter of the partnership's tax year.<br>
                    &nbsp;
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